Living in Portland

House flipping by Investors is nothing new. On the West Coast, it started in California during the early days of the housing boom. Loans for Investors were so easy to receive that almost anyone could play the game. To flip a house, an Investor would first find a home to purchase, favorably one not listed with a Realtor. The perfect target was a 1200 square foot 1950’s ranch (ugliness preferred). Next, he or she would replace the finishes. This included, among other things, adding granite counter tops, new tile in the bathrooms and kitchen, refinishing hardwood floors, painting, and sprucing up the landscape. This could be done without a permit by anyone who had the resources.

Once the house was shiny and fresh, it would be listed with a local Realtor for $50,000-$100,000 more than the Investor originally paid. The market was so hot that Buyers would compete for the chance to purchase this ‘remodeled’ home. Often, the winning Buyer would have to waive his or her right to an inspection in order to make the offer more attractive. This was the key for Investors since they did nothing to improve the mechanics of the house. Buyers were too caught up in the shiny finishes to think about essentials like plumbing, electrical wiring, and the roof.

Today, things have changed dramatically. Loans for Investors are no longer easy to attain, making the old method of house flipping impossible. Two things that make today’s Real Estate Market stand out from the days of the housing boom are short sales and foreclosures. Now, Investors must have cash readily available in order to purchase distressed properties. The reward, however, is that the return is just as high.

The house flipping process of today follows quite a different pattern than the original process. First, an investor tosses in low-ball cash offers on foreclosures (quick turn around) and/or short sales (long turn around) that are in very good condition. — In Portland, we find that Sellers do not trash their homes prior to moving out, so most of them are still in good condition. — Eventually, one of the offers on the house will go to closing. The Investor, while working with a Realtor, then lists the property for sale at market value and flips it without doing any remodeling. Since there is no underlying loan and the monthly expense is minimal (utilities and lawn maintenance), the carrying costs are low as well. A smart Investor will only make offers on homes that are $50,000-$75,000 under market value, leaving plenty of room to negotiate. Remember, the key here is cash.

Lenders have caught on to this practice so Fannie Mae has added a new restriction to home loans. The rule is that the same person must own a home for 90 days prior to a sales contract being written and accepted. For example, a home purchased by an Investor on May 1st could not enter into a sales agreement with a Buyer until August 1st. It would then take 45-60 days to close on the Buyer’s new loan. Although the total process could easily take a year, the high return on investment and minimal time invested are likely to make it worth it in the end. It may now be time to ask, is house flipping right for you?